Economy

All of my work regarding QE has me wondering why the Fed would implement such a policy when the evidence appears to point to little to no gain in economic growth? The only logical answer is that QE2 is really just another case of the Federal Reserve proving that this is a country centered around the bankers, by the bankers and for the bankers. Before you brush me off as some conspiracy theorist please consider the evidence.

There’s no doubt that it’s a brutal mess. The banks have been servicing mortgages and chasing delinquents with the same carelessness and indifference to due process that they demonstrated when they underwrote and securitized the mortgages in the first place. A foreclosing bank should be able, at a minimum, to produce the original mortgage note to demonstrate that it has the right to foreclose. But many banks have been unwilling or unable to do so.

The real estate and banking excesses in Spain were a lot like those in the United States. Construction boomed, prices rose at an astonishing pace and banks gave out loans just as fast, often to customers like Mr. Marbán, who used the equity in his house to finance a mortgage for his shop. But those days are over. Spain now has the highest unemployment rate in the euro zone — 20 percent — and real estate prices are dropping.

Several hundred thousand people demonstrated again on Thursday to protest changes in France’s retirement age, but the numbers were down significantly from previous national days of protest, and it appeared that President Nicolas Sarkozy and his government had won an important victory.

Energy

“I think we’re going to see a burst of projects over the next two months and then you’re going to hear the sounds of silence for quite a while,” said David Crane, chief executive of NRG Energy, on Wednesday after he announced that his company would invest $300 million in the Ivanpah plant.

Having blocked shipments of raw rare earth minerals to Japan since mid-September, and to the United States and Europe since early last week, Chinese customs agents on Thursday morning allowed shipments to resume to all three destinations, the industry officials said. They spoke only on condition of anonymity because of the business and diplomatic delicacy of the issue.

At the recent GridWise Global Forum leaders addressed the development of the infrastructure to support how electrified cars will charge up, where they will get their juice, and how soon it will all be made available. Auto manufacturers are currently producing and developing plug-in electric vehicles (EVs) that are safe, affordable and even fun to drive. Automakers see promise in EVs that use electric drive trains instead of conventional ones.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

"Public pension funds across the U.S. are adjusting their assumptions following losses in the recession that within three years may leave them $1 trillion short of the amount needed to pay benefits, according to a National Bureau of Economic Research report. The largest fund, the California Public Employees Retirement System, known as Calpers, uses a 7.75 percent assumed rate of return.

“The impact of reducing the assumed investment return and assumed inflation rates will result in a better representation of the fiscal condition of Calstrs benefit programs based on the current economic outlook,” the fund’s actuary Rick Reed said in a report to be presented to the board.

Calstrs, as the teachers’ fund is known, is 78 percent funded, meaning it is short by more than $42 billion. Reducing the assumed rate of return would lower that funding level to 74.2 percent, according to the report posted on the fund’s website.

Higher Contributions

The fund, which provides benefits for 848,000 public-school and community-college teachers, would need to ask lawmakers for an increase of as much as 16.8 percent in the amount the state and school districts pay toward employee retirement benefits if the board adopts the 7.5 percent assumed rate of return. Teachers are likely to be asked to pay more from their paychecks as well"

"New York state faces a $315 million budget deficit because tax revenue hasn’t increased as much as projected three months ago, when lawmakers approved the spending plan, the Division of Budget said.

Tax collections for this fiscal year are now forecast at $61.4 billion, down $343 million from August estimates, the division said in a report yesterday. The budget, including increased federal aid, is now estimated at $135.3 billion.

“The slowdown in economic growth in the second and third quarters of calendar year 2010 has been more pronounced than expected,” the report said. Slower growth reduced tax revenue and increased contributions to the Medicaid health-insurance program for the poor, it said.

For fiscal 2012, which begins April 1, the state faces a deficit of $9 billion, up from $8.2 billion previously estimated, according to the report. "

"The HKMA would need to build up holdings of Chinese assets to allow for the possibility of a shift in the Hong Kong dollar’s exchange-rate peg to the yuan from the U.S. dollar in coming years. Demand for yuan in the city has increased after China loosened restrictions on its use in international trade and allowed the development of an offshore market for the currency this year in Hong Kong.

Hong Kong should end its pegged regime to the greenback, as its monetary policy is tied to the “dithering” U.S. economy, Deutsche Bank AG, the world’s biggest currency trader, wrote in a report yesterday."

"The eurozone economies of Greece, Portugal and Ireland are likely to avoid sovereign bond defaults because of a strong domestic investor base of local banks and pension funds that will buy their government’s debt even in times of stress, according to Moody’s.

The US rating agency says investors should not worry about losses from bond defaults in these three so-called peripheral eurozone economies, considered the weakest in the 16-nation bloc."

"NEW DELHI (AFP) – Premier Manmohan Singh told India's energy firms on Monday to scour the globe for fuel supplies as he warned the country's demand for fossil fuels is set to soar 40 percent over the next decade.

The country of more than 1.1 billion people already imports nearly 80 percent of its crude oil to fuel an economy that is expected to grow 8.5 percent this year and at least nine percent next year.

Demand for hydrocarbons -- petroleum, coal, natural gas -- "over the next 10 years will increase by over 40 percent," Singh told an energy conference in New Delhi."

These forecasts and prognostications are all over the internet blogs as well as here on CM.com. It's unbelievable how much negativity is out there with respect to the outlook for our economy. Of course there are the divergent views, such as whether inflation, hyperinflation or deflation are in the cards, but no matter what, things do not look so good. The conspiracy theory of Wall Street, Banksters and Washington politicians getting together to trash and enslave Main Street seems less of a theory with each passing day. I try to see how Barnanke is going to squeeze through this knothole and come out the other side whole. But I don't see anything there to give me hope.

I feel like we've painted ourselves into a corner, and there's no real alternative but to try and draw this game out as long as possible. Alternative scenarios, such as to embark on restraint right away would only hasten the demise of the game.

My take on QE2:

It is a scheme to bolster the market for Treasuries. Not to drive down the Treasury bond price or to create inflation. It is a necessary policy to ensure that the U.S. doesn't get a busted Treasury auction. Even tho' the Fed might announce a rather large QE2 program, which in itself will provide a month or two of support for the Treasury market, the Fed doesn't have to spend the money until they see the market for Treasuries weaken.

Foreign holders are receiving close to zero interest on their Treasury holdings, but they're eating losses due to devaluation of the dollar, thus are already absorbing losses on their US Treasury bonds. How long will they continue to accept this, before they decide to avoid the Treasury auctions altogether? Maybe they have done so already. Not to worry, I guess, because the Fed will step in and buy what our foreign lenders do not buy.

Domestic holders of Treasuries are also receiving next to nothing in interest income for their Treasuries and their bank deposits and Money Market accounts. They absorb loss of purchasing power due to inflation, which exceeds what they're receiving on their deposits. Through the years and many business cycles, I always considered this to be a temporary matter that had to be endured during the bottom of a recession. This time I no longer think this is temporary, but the beginning of something worse.

All these shenanigans by the government are designed to get those of us who are savers and debt avoiders to go out and spend our money, or at least move out on the risk scale in persuit of higher returns, which would drive up the stock market. They are trying to shake loose the cash that has piled up on the sidelines as people and corporations have cut back and become more careful as the recession has unfolded. But this won't work, because their shenanigans are spreading fear throughout the populace, which will cause them to tighten their purse strings even more.

At any rate, QE2 will not support the bond markets forever. At some point, foreigners will get wise to the game and walk away. Then the Treasury will support the bond market by getting it's co-conspirators on Wall Street to engineer another Greece type credit crisis and resultant flight to safety of Treasury bonds. When that no longer works, they will provoke another stock market meltdown, from the lofty heights they encouraged, with similar effect on the flight to safety response (so much for moving out on the risk scale).

I think this will work for them for awhile, but eventually it has to all come unraveled.

After reading a couple of the headlines above, in reference to Moody's, I have to wonder if they aren't completely owned and controlled by the Federal Reserve. Their comments seem like 100% pure propaganda. Do they have any credibility left? Are they still taken seriously in the market place? Do investors still listen to them? Fascinating times.

The credit rating agencies are a complete and utter joke. Everything they say or do is just a charade to keep up an image, although everyone on the inside knows that their purpose is really meaningless since their interests are completely conflicted.

Good post idoctor! Despite the fact that Hugh Hendry is a 'hedgie' he actually gets why we are in the current financial mess (unlike most politicians). The problem is not capitalism per se it is an out of control banking sector and government meddling with capitalism and propping up insolvent institutions/businesses when they should be allowed to go bust and begin again. Half the problem is that these cycles take too long for anyone to take responsibility and fix the financial systems in the long term. Certain parameters need to be set in stone ( such as interest rates/the spread between loans and savings etc) and the rest of the economy needs to adjust around that.